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Modi Is Still Fighting the Damage of India’s Cash Ban Two Years Later

(Bloomberg) -- Two years after India’s Prime Minister Narendra Modi shocked the nation by banning high-value cash notes, the opposition is still trying to score political points from the damage done to the economy.

With elections looming early next year, the Congress Party is planning to hold a nationwide protest on Friday to mark the second anniversary of demonetization, a policy that caused chaos to businesses, widespread job losses and slowed economic growth. Modi’s predecessor, Manmohan Singh, said on Thursday the government should remember how “economic misadventures can roil the nation.”

“Small and medium businesses that are the cornerstone of India’s economy are yet to recover from the demonetization shock,” he said in a statement. “This has had a direct impact on employment as the economy continues to struggle to create enough new jobs for our youth.”

While growth has largely rebounded from the cash ban -- reaching more than 8 percent in the June quarter to make India the world’s fastest growing major economy -- the memories of demonetization continue to linger.

Data provided by a private research firm, the Centre for Monitoring Indian Economy Pvt., show 1.5 million jobs were lost immediately after the ban on large-denominated money notes in November 2016. That was followed eight months later by the chaotic introduction of a consumption tax, which hurt small and medium industries.

Election Risk

Those twin blows dragged India’s growth to a sub-par 6.6 percent in the financial year ended March 2018.

Even with the economy’s rebound this year, growth isn’t fast enough to create enough jobs for nearly 12 million young people entering the labor market each year, risking social unrest and denting Modi’s re-election chances.

Employment creation is a top priority for Modi after he made a campaign promise to add 10 million jobs each year. As he nears the end of his five-year term, he doesn’t have any credible numbers to show that he’s met that goal.

The central bank also came under fire during the cash ban. Governor Urjit Patel appeared to back the policy by largely remaining silent on the issue. The Reserve Bank of India has recently been more assertive against the government, pushing back against pressure to ease lending restrictions.

Modi’s government has consistently defended the cash ban. Finance Minister Arun Jaitley said in a Facebook post on Thursday the policy was a “key step in a chain of important decisions taken by the government to formalize the economy.” He added “it is now becoming increasingly difficult to evade the tax system.”

That was echoed by the Minister for Commerce and Industry, Suresh Prabhu, who said on Twitter: “#Demonetisation remains one of the many significant and bold initiatives of our Government to uproot corruption and establish transparency.”